Franchises, royalties and intellectual-property services

By Junaid IqbalUpdated 1 August 20264 min read

CA Finalist, ACCA FinalistEditorial team: Chartered Advisory Team of Chartered Accountants

Quick answer: Franchise services, royalties and the licensing of intellectual property such as trademarks and brands are taxable services under provincial sales tax, administered by the relevant authority, with Islamabad under FBR. Where franchise fees or royalties are paid to a non-resident, income-tax withholding and provincial treatment of imported services can also apply, so cross-border arrangements need particular care.

Franchising, royalties and the licensing of intellectual property are built on the grant of rights — to use a brand, a business system, a trademark. Those are services, taxed by the provinces. The sector's added complexity comes from cross-border arrangements, where royalties paid abroad bring income-tax withholding and imported-service questions into play. This guide covers domestic and cross-border treatment.

A taxable provincial service

Franchise services, royalties and the licensing of intellectual property — trademarks, brands, business systems and similar rights — are taxable services under provincial sales tax, administered by the relevant authority — PRA, SRB, KPRA or BRA — with Islamabad under FBR. A franchisor charging franchise fees, or a rights-holder charging royalties for the use of intellectual property, is generally providing a taxable service under the provincial regime. The essence of these arrangements — granting someone the right to use something you own — is a service, and provincial sales tax applies to the fees and royalties charged for it.

Cross-border royalties and franchises

The sector's distinctive challenge is cross-border. Where franchise fees or royalties are paid to a non-resident — a foreign franchisor or an overseas rights-holder — additional layers apply. Income-tax withholding on the payment typically applies, and the provincial treatment of imported or cross-border services may also be relevant, potentially placing an obligation on the recipient in Pakistan to account for tax on the service received. So a Pakistani business paying royalties abroad is not simply making a payment — it may have withholding and provincial obligations attached. Cross-border franchise and royalty arrangements therefore need careful handling across both sales tax and income tax, and the interaction should be worked through before payments are made rather than discovered afterwards.

Services versus goods in a franchise

A franchise is often more than pure rights. The franchise, royalty and licensing elements are services — but where a franchise also involves supplying physical goods or equipment (stock, fittings, branded products), those goods follow the federal regime. So a franchise package can have a provincial services element (the franchise and licensing fees) and a federal goods element (any equipment or goods supplied), which should be identified separately, echoing the bundled-supply analysis. The recurring commission and fee treatment of intermediaries who arrange such deals connects to the agency and commission rules. Mapping each element of a franchise to its correct regime keeps the whole arrangement compliant.

Worked illustration. A local company operates a franchise under an international brand, paying royalties to the foreign franchisor. It accounts for income-tax withholding on the cross-border royalty and considers the provincial treatment of the imported service. Domestically, when it sub-franchises to a local operator, it charges provincial sales tax on the franchise fee as a taxable service, and treats any equipment it supplies to that operator under the federal goods regime.

Common mistakes

Treating franchise fees or royalties as outside the provincial services net.
Overlooking withholding and imported-service obligations on royalties paid abroad.
Failing to separate the services element of a franchise from any goods supplied.
Assuming a single treatment for a franchise package that spans both regimes.

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Where it fits

Franchise and royalty arrangements straddle the federal-versus-provincial divide when goods are involved, lean on bundled-supply analysis, and connect to commission treatment. For province detail, see the Punjab (PRA) and Sindh (SRB) overviews. Franchise, royalty and IP fees are taxable services; cross-border adds withholding.

Confirm before you rely on this. Franchise, royalty and cross-border treatment is set by provincial law, the Income Tax Ordinance and the relevant authorities, and changes regularly. Confirm the current position from PRA, SRB, KPRA, BRA or FBR, or a qualified tax adviser.

Where the rate actually comes from

Licensing of intellectual property sits in the reduced-rate part of the Sindh schedule, and a franchise arrangement commonly mixes a licensed right with supplied goods and support services that are not all taxed the same way.

The standard rate is 16 per cent in Punjab and 15 per cent in Sindh, Khyber Pakhtunkhwa and Balochistan, with telecommunication services higher at 19.5 per cent and Islamabad Capital Territory administered by FBR. Sindh has also moved from a positive list to a negative list, so a Sindh service is taxable unless it is specifically exempt — if you concluded some years ago that you were outside the net, that conclusion needs re-testing. The full picture is in the rates by province guide; the authoritative figure for your own category is in the current working tariff published by Sindh Revenue Board or the authority for your province.

Source check: 14 September 2026. Standard provincial rates and the Sindh negative-list reform are sourced in the rates-by-province guide. The category treatment described above is general orientation and has not been confirmed line by line against any authority's current schedule — read your own entry in the applicable working tariff before invoicing.

Sources

This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.

Questions people also ask

Are franchise fees and royalties subject to sales tax?

Yes. Franchise services, royalties and the licensing of intellectual property such as trademarks and brands are taxable services under provincial sales tax, administered by the relevant authority, with Islamabad under FBR. So a franchisor charging franchise fees, or a rights-holder charging royalties, is generally providing a taxable service under the provincial regime.

How are royalties paid to a foreign company treated?

With extra layers. Where franchise fees or royalties are paid to a non-resident, income-tax withholding on the payment typically applies, and the provincial treatment of imported or cross-border services may also be relevant, potentially placing an obligation on the recipient in Pakistan. Cross-border franchise and royalty arrangements therefore need careful handling across both sales tax and income tax.

Is a franchise arrangement a service or a supply of goods?

The franchise, royalty and licensing elements are services — the grant of rights to use a brand, system or intellectual property. Where a franchise also involves supplying physical goods or equipment, those goods follow the federal regime, so a franchise package can have a provincial services element and a federal goods element that should be identified separately.

Scope note: General educational information for Pakistan, not a legal opinion or a substitute for advice based on your documents. Law, notifications, portal procedures and individual facts can change the result.

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